February 20, 2020 - 8:00 AM EST
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Gear Energy Ltd. Announces Fourth Quarter 2019 Operating Results

Canada NewsWire

CALGARY, Feb. 20, 2020 /CNW/ - Gear Energy Ltd. ("Gear" or the "Company") (TSX:GXE) is pleased to provide the following fourth quarter operating update to shareholders. Gear's Consolidated Financial Statements and related Management's Discussion and Analysis ("MD&A") for the period ended December 31, 2019 are available for review on Gear's website at www.gearenergy.com and on www.sedar.com.

Financial Summary






Three months ended


Twelve months ended

(Cdn$ thousands, except per share, share and per
boe amounts)

Dec 31,
2019

Dec 31,
2018

Sep 30,
2019


Dec 31,
2019

Dec 31,
2018

FINANCIAL







Funds from operations (1)

13,738

2,089

15,968


61,842

35,418

 Per boe

21.68

3.32

25.07


24.34

14.28

   Per weighted average basic share

0.06

0.01

0.07


0.28

0.18

Cash flows from operating activities

11,401

1,538

13,613


49,876

41,752

Net (loss) income

(8,045)

10,553

3,493


(5,680)

5,094

   Per weighted average basic share

(0.04)

0.05

0.02


(0.03)

0.03

Capital expenditures

12,603

9,482

11,800


36,989

43,859

Decommissioning liabilities settled

889

1,401

1,170


2,932

2,981

Net acquisitions (dispositions) (2)

109

302

115


(976)

66,172

Net debt (1)(3)

69,752

91,908

69,837


69,752

91,908

Weighted average shares, basic (thousands)

218,365

219,013

219,084


218,887

202,020

Shares outstanding, end of period (thousands)

217,610

219,015

218,873


217,610

219,015








OPERATING







Production







     Heavy oil (bbl/d)

4,034

4,064

3,929


4,053

4,388

     Light and medium oil (bbl/d)

1,763

1,834

2,059


1,963

1,374

     Natural gas liquids (bbl/d)

269

267

218


238

244

     Natural gas (mcf/d)

4,935

4,091

4,295


4,252

4,680

     Total (boe/d)

6,888

6,847

6,922


6,962

6,786

Average prices







     Heavy oil ($/bbl)

49.17

22.45

52.93


53.87

45.01

     Light and medium oil ($/bbl)

64.82

46.68

65.88


66.69

63.73

     Natural gas liquids ($/bbl)

22.79

23.95

26.70


22.26

34.26

     Natural gas ($/mcf)

2.36

1.45

0.79


1.63

1.29

Netback ($/boe)







     Commodity and other sales

47.97

27.64

50.97


51.94

44.13

     Royalties

(5.52)

(3.44)

(6.06)


(5.71)

(5.19)

     Operating costs

(17.93)

(17.13)

(17.20)


(17.98)

(16.97)

     Operating netback (1)

24.52

7.07

27.71


28.25

21.97

     Realized risk management gain (loss)

0.58

(0.90)

0.80


(0.12)

(4.29)

     General and administrative

(2.13)

(1.18)

(2.03)


(2.17)

(2.08)

     Interest

(1.30)

(1.50)

(1.52)


(1.65)

(1.10)

   Transaction costs

-

(0.19)

-


-

(0.21)

 Realized gain (loss) on foreign exchange

0.01

0.02

0.11


0.03

(0.01)








TRADING STATISTICS

($ based on intra-day trading)







High

0.48

1.23

0.60


0.88

1.47

Low

0.26

0.44

0.41


0.26

0.44

Close

0.46

0.57

0.47


0.46

0.57

Average daily volume (thousands)

529

558

406


418

592









(1)

Funds from operations, net debt and operating netback are non-GAAP measures and are reconciled to the nearest GAAP measures under the heading "Non-GAAP Measures" in Gear's MD&A.

(2)

Net acquisitions (dispositions) exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closing adjustments.

(3)

Net debt includes the risk management liability acquired through the Steppe Resources Inc. corporate acquisition. December 31, 2019 – nil, December 31, 2018 – $4.5 million, September 30, 2019 – $0.7 million.

 

MESSAGE TO SHAREHOLDERS

Despite ongoing macro volatility in the Canadian energy business, the Gear team delivered exceptional performance through 2019. With annual funds from operations exceeding capital investment by a healthy margin, Gear was able to reduce outstanding net debt by over 24 per cent, exiting 2019 with a strong balance sheet and a very competitive net debt to funds from operations ratio of 1.1 times. In the meantime, production was held essentially flat year over year, with a small increase in both the total liquids weighting and the portion of those liquids that are classified as light and medium oil. In addition, during 2019 Gear acquired 1.6 million of its common shares for the aggregate purchase price of $0.7 million pursuant to its Normal Course Issuer Bid ("NCIB") that commenced in September 2019.

The strong 2019 financial and operational results were assisted by an improved Canadian oil price environment compared to the challenges of 2018 and by continued executional success across three core assets. Although WTI oil prices declined year over year, from US $64.77 to $57.03 per barrel, the Canadian differentials compressed materially. In combination with the improvement in commodity mix, Gear's realized pricing increased 18 per cent from $44.13 to $51.94 per boe. This factor combined with reduced losses on risk management contracts and a stable cost profile helped to drive an impressive 70 per cent year over year increase in annual funds from operations to a five-year record high figure of $24.34 per boe.

Moving into 2020, the market has delivered some early volatility with WTI oil prices already fluctuating by over 24 per cent. However, Canadian differentials currently appear to be improving from the prices seen at the outset of the year to prices more in line with the expectations outlined in the Gear 2020 budget (See "Gear Energy Ltd. Provides 2020 Budget Guidance" dated December 18, 2019). The Gear team remain cautiously optimistic that 2020 will again support further value creation through a combination of production stability, continued improvement of the balance sheet and additional purchases of Gear's common shares under the NCIB.

QUARTERLY HIGHLIGHTS

  • Production for the fourth quarter of 6,888 boe per day was essentially unchanged from production in the third quarter of 6,922 boe per day.

  • Generated $13.7 million of funds from operations ($21.68 per boe) compared to $2.1 million in the fourth quarter of 2018 and $16.0 million in the third quarter of 2019. The 558 per cent increase in the fourth quarter of 2019 was due to a significant narrowing of Canadian oil differentials which had suffered record low benchmark pricing in the fourth quarter of 2018 as a result of egress and inventory issues.

  • Exited the quarter with net debt of $69.8 million and a net debt to quarterly annualized funds from operations of 1.3 times. Net debt included $64.3 million of bank debt, $13.2 million of convertible debentures, and positive working capital of $7.7 million.

  • Successfully drilled two multi-lateral horizontal heavy oil wells in Wildmere, one multi-lateral horizontal heavy oil well in Maidstone, and two light oil wells in Tableland.

ANNUAL HIGHLIGHTS

  • Reduced net debt by $22.2 million or 24 per cent from $91.9 million to $69.8 million as a result of strong funds from operations generation while essentially maintaining stable production and Proved Developed Producing reserves (See "Gear Energy Ltd. Announces 2019 Year-end Reserves" dated February 20, 2020). The net debt to annual funds from operations ratio came in at a very competitive 1.1 times.

  • Delivered the highest funds from operation, both absolute and per boe, since 2014. Generated $61.8 million of funds from operations ($24.34 per boe) compared to $35.4 million ($14.28 per boe) in 2018. The 70 per cent increase in funds from operations per boe was due to a combination of stronger commodity prices, increased light oil production, reduced realized losses on risk management contracts, stable costs and a 3 per cent increase in annual production.

  • Reported record high annual production of 6,962 boe per day with a 90 per cent liquids weighting (2018 – 89 per cent). Additionally, the light, medium, and NGL weighting improved to 32 per cent (2018 – 24 per cent) while the heavy oil weighting declined to 58 per cent (2018 – 65 per cent). These improvements were the result of a successful 2019 drilling program combined with the full annual impacts of the acquisition of Steppe Resources Inc. in late 2018.

  • Drilled 16 gross (16 net) wells with a 100 per cent success rate including 10 heavy oil wells (10 net): eight in Wildmere and two in Maidstone; and six light oil wells (six net): five in Tableland and one in Wilson Creek.  The 10 well heavy oil program met expectations by delivering an average peak IP30 rate per well of approximately 110 barrels per day. The first three wells in Tableland included two core area wells that delivered peak IP30 rates of approximately 200 and 300 barrels per day and a step out well with a peak IP30 rate closer to 150 barrels per day. The final two wells in Tableland continue to be optimized with peak IP30 rates to date of approximately 190 and 130 barrels per day.

  • During 2019, Gear invested $2.9 million to abandon 77 wells at an average cost that was approximately half of what was estimated by the provincial regulators. Gear abandoned 4.8 times the number of wells that were drilled during the year. A similar amount is forecast to be invested in 2020.

2020 OUTLOOK

  • Commodity price volatility has been significant for the first two months of 2020. Early in January, WTI briefly touched US$65 per barrel as a result of plateauing US oil production, OPEC production cuts, and continued strong world demand. Since then, WTI has fallen to approximately US$54 as a result of concerns of an economic slowdown in China impacted by the coronavirus outbreak. As always, balance sheet strength is paramount, and Gear will be nimble in its capital deployment to ensure that annual capital expenditures approximate funds from operations.

  • 2020 Guidance remains unchanged and as follows:

 


2020 Guidance

Annual Production (boe/d)

7,000

Heavy Oil Weighting (%)

57

Light/Medium Oil & NGL Weighting (%)

33

Fourth Quarter Production (boe/d)

>7,400

Fourth Quarter Light/Medium Oil & NGL weighting (%)

37

Royalties (%)

11

Operating and Transportation Costs ($/boe)

18.00

G&A Costs ($/boe)

2.35

Interest Costs ($/boe)

1.35

Capital Expenditures ($ million)

46.5

Abandonment Expenditures ($ million)

3.5

 

GEAR ENERGY LTD.

CONSOLIDATED BALANCE SHEETS (unaudited)

As at December 31


 

(Cdn$ thousands)


2019


2018

ASSETS





Current assets






Accounts receivable

$

11,343

$

5,716


Prepaid expenses


3,196


3,914


Inventory


6,515


7,185


Risk management contracts


-


3,230




21,054


20,045







Deferred income tax asset


23,281


26,531

Risk management contracts


-


1,644

Property, plant and equipment


317,035


331,622

Total assets

$

361,370

$

379,842







LIABILITIES





Current liabilities






Accounts payable and accrued liabilities

$

13,348

$

12,475


Convertible debentures


12,705


-


Decommissioning liability


2,840


1,843


Risk management contracts


3,094


-




31,987


14,318







Debt


64,254


78,461

Convertible debentures


-


12,297

Decommissioning liability


82,874


86,839

Total liabilities


179,115


191,915







SHAREHOLDERS' EQUITY






Share capital


335,455


337,740


Warrants


-


129


Equity component of convertible debentures


2,498


2,519


Contributed surplus


18,097


15,654


Deficit


(173,795)


(168,115)

Total shareholders' equity


182,255


187,927

Total liabilities and shareholders' equity

$

361,370

$

379,842

 


GEAR ENERGY LTD.













CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)


For the years ended December 31


(Cdn$ thousands)




























Share

Capital


Warrants


Equity
Component of
Convertible
Debentures


Contributed
Surplus


Deficit


Total
Equity

Balance at December 31, 2017

$

311,240

$

129

$

2,592

$

15,178

$

(173,209)

$

155,930

Exercise of stock options


1,355


-


-


(600)


-


755

Issued as consideration on corporate










-



acquisition


24,743


-


-


-




24,743

Share issue costs


(7)


-


-


-


-


(7)

Issued on conversion of convertible          













debentures


409


-


(73)


-


-


336

Share-based compensation


-


-


-


1,076


-


1,076

Net income for the year


-


-


-


-


5,094


5,094

Balance at December 31, 2018

$

337,740

$

129

$

2,519

$

15,654

$

(168,115)

$

187,927

Exercise of stock options


51


-


-


(51)


-


-

Common shares repurchased


(2,455)


-


-


1,713


-


(742)

Warrant expiry


-


(129)


-


129


-


-

Issued on conversion of convertible          













debentures


119


-


(21)


-


-


98

Share-based compensation


-


-


-


652


-


652

Net loss for the year


-


-


-


-


(5,680)


(5,680)

Balance at December 31, 2019

$

335,455

$

-

$

2,498

$

18,097

$

(173,795)

$

182,255














 

 

GEAR ENERGY LTD.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (unaudited)




Three Months Ended

December 31

Twelve Months Ended

December 31

(Cdn$ thousands, except per share amounts)


2019


2018


2019


2018

REVENUE










Sales of crude oil, natural gas and natural gas liquids

$

30,396

$

17,408

$

131,989

$

109,316


Royalties


(3,497)


(2,164)


(14,513)


(12,858)



26,899


15,244


117,476


96,458












Realized gain (loss) on risk management contracts


366


(567)


(300)


(10,619)


Unrealized (loss) gain on risk management contracts


(6,426)


21,283


(12,440)


14,641




20,839


35,960


104,736


100,480











EXPENSES










Operating


11,363


10,790


45,691


42,033


General and administrative


1,350


745


5,517


5,163


Interest and financing charges


821


944


4,186


2,728


Depletion, depreciation and amortization


12,591


11,959


50,339


42,142


Accretion


497


630


2,190


2,303


Share-based compensation


145


230


652


1,076


Gain on foreign exchange


(596)


(10)


(753)


(17)


Gain on asset disposition


-


-


(776)


(556)


Bad debt expense


113


-


113


-


Transaction costs 


-


119


7


514




26,284


25,407


107,166


95,386











Deferred tax expense


(2,600)


-


(3,250)


-

Net (loss) income and comprehensive (loss) income

$

(8,045)

$

10,553

$

(5,680)

$

5,094











Net (loss) income per share, basic and diluted

$

(0.04)

$

0.05

$

(0.03)

$

0.03

 

GEAR ENERGY LTD.









CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)






















Three Months Ended

December 31

Twelve Months Ended

December 31

(Cdn$ thousands)


2019


2018


2019


2018











CASH FLOWS FROM OPERATING ACTIVITIES









Net (loss) income

$

(8,045)

$

10,553

$

(5,680)

$

5,094

Add items not involving cash:









Unrealized loss (gain) on risk management contracts     


6,426


(21,283)


12,440


(14,641)

Depletion, depreciation and amortization


12,591


11,959


50,339


42,142

Accretion


497


630


2,190


2,303

Share-based compensation


145


230


652


1,076

Gain on asset disposition


-


-


(776)


(556)

Unrealized gain on foreign exchange


(589)


-


(686)


-

Bad debt expense


113


-


113


-

Deferred tax expense


2,600


-


3,250


-

Decommissioning liabilities settled


(889)


(1,401)


(2,932)


(2,981)

Change in non-cash working capital


(1,448)


850


(9,034)


9,315




11,401


1,538


49,876


41,752











CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES









Borrowings (repayments) of debt under credit facility


1,937


12,302


(13,521)


37,116

Common shares repurchased


(623)


-


(742)


-

Repayment of debt assumed on corporate acquisition


-


-


-


(36,251)

Issuance of share capital, net of share issue costs


-


44


-


748



1,314


12,346


(14,263)


1,613










CASH FLOWS USED IN INVESTING ACTIVITIES









Property, plant and equipment expenditures


(12,603)


(9,482)


(36,989)


(43,859)

Acquisition of petroleum and natural gas properties


(127)


(2)


(133)


(452)

Disposition of petroleum and natural gas properties


18


-


1,109


556

Cash received on corporate acquisition


-


-


-


693

Change in non-cash working capital


(3)


(5,093)


400


(303)




(12,715)


(14,577)


(35,613)


(43,365)










DECREASE IN CASH AND CASH EQUIVALENTS


-


(693)


-


-

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR


-


693


-


-

CASH AND CASH EQUIVALENTS, END OF YEAR

$

-

$

-

$

-

$

-












 

Forward-looking Information and Statements

This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to the following: Gear's expectations as to commodity prices and differentials in 2019; the expectation that 2020 may support further value creation through a combination of production stability, continued improvement of the balance sheet and additional purchases of Gear's common shares under the NCIB; the expectation of future production rates of certain of Gear's wells; Gear's 2019 outlook and guidance for the first half of 2019, including expected average production, commodity weightings, royalties, G&A costs, interest costs and capital and abandonment expenditures; and Gear's intention to be nimble in its capital deployment to ensure that annual capital expenditures approximate funds from operation.

The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Gear including, without limitation: that Gear will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the accuracy of the estimates of Gear's reserves and resource volumes; certain commodity price and other cost assumptions; and the continued availability of adequate debt and equity financing and funds from operations to fund its planned expenditures. Gear believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

To the extent that any forward-looking information contained herein may be considered a financial outlook, such information has been included to provide readers with an understanding of management's assumptions used for budgeting and developing future plans and readers are cautioned that the information may not be appropriate for other purposes. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of Gear's products; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of Gear or by third party operators of Gear's properties, increased debt levels or debt service requirements; inaccurate estimation of Gear's oil and gas reserve and resource volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; and certain other risks detailed from time to time in Gear's public documents including in Gear's most current annual information form which is available on SEDAR at www.sedar.com.

The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Gear does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

NON-GAAP Measures

This press release contains the terms funds from operations, net debt, operating netback and corporate netback, which do not have standardized meanings under Canadian generally accepted accounting principles ("GAAP") and therefore may not be comparable with the calculation of similar measures by other companies. Management believes that these key performance indicators and benchmarks are key measures of financial performance for Gear and provide investors with information that is commonly used by other oil and gas companies. Funds from operations is calculated as funds from operating activities before changes in noncash operating working capital and decommissioning liabilities settled. Net debt is calculated as debt less current working capital items, excluding risk management contracts. Operating netbacks are presented both before and after taking into account the effects of hedging and are calculated based on the amount of revenues received on a per unit of production basis after royalties and operating costs. Corporate netbacks are presented after taking into account the effects of hedging and are calculated based on the amount of revenues received on a per unit of production basis after royalties, operating costs, general and administrative expenses, interest and foreign exchange gain or loss. Additional information relating to certain of these non-GAAP measures, including the reconciliation between funds from operations and cash flow from operating activities, can be found in the MD&A.

Barrels of Oil Equivalent

Disclosure provided herein in respect of BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of six Mcf to one Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and do not represent a value equivalency at the wellhead. Additionally, given that the value ratio based on the current price of crude oil, as compared to natural gas, is significantly different from the energy equivalency of 6:1; utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

Initial and Other Production Rates 

Any references in this document to initial production rates or production rates of new wells over a period of time are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells or other future wells will continue production and decline thereafter. Additionally, such rates may also include recovered "load oil" fluids used in well completion stimulation. There is no certainty that other wells on such properties will achieve such production levels. Readers are cautioned not to place reliance on such rates in calculating the aggregate production for Gear.

SOURCE Gear Energy Ltd.

View original content to download multimedia: http://www.newswire.ca/en/releases/archive/February2020/20/c2389.html

Ingram Gillmore, President & CEO, 403-538-8463; David Hwang, Vice President Finance & CFO, 403-538-8437; Email: info@gearenergy.com, Website: www.gearenergy.comCopyright CNW Group 2020


Source: Canada Newswire (February 20, 2020 - 8:00 AM EST)

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